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Summarizing by Shane Ramsey

Kenneth Pettine v. Joli Lofstedt

Case Type:
Case Status:
Affirmed in part and Reversed in part
23-013 (10th Circuit, Nov 15,2023) Published
In this challenge by Kenneth Pettine (DR), a chapter 7 debtor, of the decision of the U.S. Bankruptcy Court for the District of Colorado (BC) granting the motion by a trustee (TR) for a charging order against a membership interest the DR held in a Wyoming LLC that is now property of the bankruptcy estate, the Bankruptcy Appellate Panel of the Tenth Circuit (BAP) reversed the BC's decision that the DR lacked the standing to contest the order but affirmed as to the BC's alternate cocnlusion: that even if the DR had standing, the TR was entitled to the charging order.
Procedural context:
On April 14, 2023, the DR filed a single notice of appeal of an order regarding the TR's motion for charging order and sale (the Order Regarding Charging Order and Sale), a charging order (Charging Order) and an order authorizing sale of his membership interest (Sale Order, and, together with the prior two orders, collectively, Orders), all of which derived from the TR's Motion for Charging Order and to Approve Sale. The BAP subsequently construed the Orders as two separate appeals and later dismissed the DR's appeal of the Sale Order for failure to prosecute, leaving only the Charing Order and Order Regarding Charging Order and Sale on deck. In the Order Regarding Charging Order and Sale, the BC determined that DR had no standing to challenge the issuance of the Charging Order but also determined, in the alternative, that determined that the TR had the right under 11 U.S.C. § 544(a)(1) to a charging order against the membership Interest pursuant to Wyoming law and that the Charging Order would issue “in the amount of $681,907.18, less all sums collected by the Trustee.” The Charging Order similarly states that it is “in the amount of $681,907.18, less all amounts collected by the Trustee, until satisfied in full.”
The DR filed a chapter 7 petition for bankruptcy relief on April 23, 2019, in the BC. As of the petition date, the DR held a 2.55754% membership interest in Direct Biologics, LLC (Direct Biologics or the LLC). Direct Biologics is a multi-member Wyoming limited liability company governed by Wyoming law whose operating agreement (the Operating Agreement) contains certain transfer restrictions, which limit the ability to transfer membership interests to unrelated non-member third parties. On May 5, 2020, the TR filed a motion to sell the DR's membership interest in this entity and other unrelated nonexempt assets for $25,000 to the DR; a second such motion followed after the TR's discussions with a person holding 95% of the general unsecured claims filed against the bankruptcy estate. The BC, however, denied the second motion, essentially concluding the Trustee could not sell the membership interest without complying with the Operating Agreement’s transfer restrictions. Later, the DR filed a motion for the abandonment of this stake; the TR objected and followed up with the TR's Motion for Charging Order and to Approve Sale pursuant to which the TR sought to exercise the rights and powers of a hypothetical judicial lien creditor under 11 U.S.C § 544(a)(1) to obtain a charging order under Wyoming law against the membership interest and for authority to sell that interest in the charging order free and clear of lien. Both the DR and Direct Biologics filed objections to the Motion for Charging Order and to Approve Sale.
Robert H. Jacobvitz; Dale L. Somers; and Janice Loyd

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